Dominant Paradigm: Trade mediates preexisting conflicts of interest
Governments value trade, conflict disrupts trade
\(\implies\) Commercial peace hypothesis
Conflicts of interest: territorial, ideological, etc
Commercial Policy Objectives
Governments weakly mercantilistic, desiring
Some degree of trade protection at home
Trade liberalization or market access abroad
Market Access Externalities
Protectionist barriers shift profits from foreign to home firms
Thus, trade policy itself generates conflicts of interest between mercantilist governments
Perry Expedition: Governments willing to threaten war to open foreign markets
Political Bias (Jackson and Morelli 2007)
Local definition: Degree to which government internalizes narrow (protectionist) interests of firms at the expense of broad (liberal) interests of consumers
Grossman and Helpman (1994), Bueno de Mesquita et al (2004)
Regimes and Political Bias
Democracies afford consumers (voters) access to policymaking process, more liberal trade policy preferences than autocracies (Mayer 1984, Grossman and Helpman 1996, Milner and Kubota 2005)
Argument in Brief: For democracies, liberal preferences \(\implies\) smaller market access externalities \(\implies\) smaller conflicts of interest \(\implies\) fewer wars
Additionally, liberal preferences \(\implies\) more trade
Spurious correlation between trade and peace
Model Structure
Bargaining Environment
Two governments bargain over trade policies, \(\widetilde{\boldsymbol{\tau}} = \left\{ \tau_i, \tau_j \right\}\)
“Home” gov \(i\) makes TIOLI offer to “foreign” gov \(j\)
Information about \(j\)’s costs of war held privately
Title Slide Image Credit: Charles Severin (American lithographer, born between 1808-1820; died ca. 1860). 1853 (creation). The American Expedition, Under Commodore Perry, Landing in Japan, July 14, 1853, Overall view. visual works; prints (visual works); planographic prints; lithographs. https://library.artstor.org/asset/SS35100_35100_35234600
Bargaining
\(c_i\) - home government’s costs of war
\(c_j \sim F\) - home’s belief about foreign’s costs of war